Fraudulent Transfer of Intangible Asset – December 2016

 

Last month I used a novel application of the Uniform Fraudulent Transfer Act (G.L.c.109A) to obtain a substantial recovery for a commercial client.

 

Typically fraudulent transfer remedies apply where an insolvent debtor transfers an asset to a third party without receiving "reasonably equivalent value." A successful creditor is entitled to recover the value of a fraudulently transferred asset from a third party as damages.

 

Most applications of the statutory remedy involve a conveyance of tangible assets where the transfer is readily apparent and its value easily discernable. My case involved an intangible asset - the insolvent judgment debtor's promise not to compete against a third party competitor. The debtor, being insolvent, simply went out of business, after it was unable to satisfy conditions to close a contemplated merger with the competitor. Under these circumstances, the issue was whether an asset was actually "transferred" to the competitor under the UFTA and, if so, what was the value of the asset so transferred. The competitor hired an expert who offered the opinion that the business of the insolvent debtor had no goodwill.

 

Through post-judgment discovery the debtor's principal acknowledged that the value of the failed merger was based entirely on the prospect of eliminating the debtor as a competitor in the marketplace. The competitor was able to achieve the same benefit by simply letting the debtor go out of business without having to pay anything. I brought a claim on behalf of my creditor client alleging that, under these circumstances, a fraudulent transfer had occurred. The challenge was that no asset had actually been transferred in any traditional sense.

 

The UFTA provides expansive definitions as to both "asset" and "transfer" to support a creditor's recovery under these circumstances. In reliance on those broad definitions, it was possible to negotiate an advantageous settlement of the creditor’s claim based upon the valuation contained in the failed merger agreement. As a result, the client was able to recover the debt owed it, eventhough the debtor’s business had failed leaving no tangible assets of any sort.